Endeavour Mining — First indications of exploration success

Endeavour Mining (LSE: EDV)

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Research: Metals & Mining

Endeavour Mining — First indications of exploration success

Only a year into a five-year exploration programme, Endeavour achieved one of its primary objectives in the form of a standalone greenfield discovery at its Tanda-Iguela property in Côte d’Ivoire, where it has successfully delineated 1.1Moz indicated and 1.9Moz inferred resources in less than a year. Almost simultaneously, it announced a 0.75Moz increase in measured & indicated (M&I) resources at Ity (excluding 2022 mine depletion), putting it on track to meet its total exploration target of 15.0–20.0Moz by 2025. Updates for its remaining assets are anticipated in early 2023.

Tom Batho

Written by

Tom Batho

Associate Analyst

Metals & Mining

Endeavour Mining

First indications of exploration success

Q322 exploration and financial results

Metals and mining

16 December 2022

Price

1,783p

Market cap

£4,386m

C$1.3658/US$, US$1.2259/£

Net cash (US$m) at end-September 2022, excludes lease liabilities, option premium and restricted cash

10.9

Shares in issue

247m

Free float

73.2%

Code

EDV

Primary exchange

LSE

Secondary exchange

TSX, USOTC

Share price performance

%

1m

3m

12m

Abs

2.7

2.7

12.7

Rel (local)

2.5

1.1

12.9

52-week high/low

2,090p

1,461p

Business description

Following its acquisitions of SEMAFO and Teranga, Endeavour Mining has become one of the top 10 major gold producers globally, with six mines in Côte d’Ivoire, Burkina Faso and Senegal plus a portfolio of development projects, all in the West African Birimian greenstone belt.

Next events

Exploration update

Early 2023

Q422/FY22 results

March 2023

Analysts

Tom Batho

+44 (0)20 3077 5734

Lord Ashbourne

+44 (0)20 3077 5724

Endeavour Mining is a research client of Edison Investment Research Limited

Only a year into a five-year exploration programme, Endeavour achieved one of its primary objectives in the form of a standalone greenfield discovery at its Tanda-Iguela property in Côte d’Ivoire, where it has successfully delineated 1.1Moz indicated and 1.9Moz inferred resources in less than a year. Almost simultaneously, it announced a 0.75Moz increase in measured & indicated (M&I) resources at Ity (excluding 2022 mine depletion), putting it on track to meet its total exploration target of 15.0–20.0Moz by 2025. Updates for its remaining assets are anticipated in early 2023.

Year end

Revenue (US$m)

EBITDA (US$m)

PBT*
(US$m)

Operating cash flow per share (US$)

DPS
(c)

Yield
(%)

12/20

1,847.9

910.3

501.2

5.35

37

1.9

12/21

2,903.8

1,517.3

756.5

4.83

56

2.2

12/22e

2,456.9

1,261.1

568.0

4.31

83

3.9

12/23e

2,219.0

1,223.2

763.3

3.73

84

3.9

Note: *PBT is normalised, excluding amortisation of acquired intangibles and exceptional items.

Q322 results

In November, Endeavour announced a positive set of Q322 results as it remains on track to meet its output and cost targets for the year of 1,315–1,400koz gold produced at an all-in sustaining cost (AISC) of US$880–930/oz, respectively. Production for the quarter was 342.7koz (cf our expectation of 313.9koz) at an AISC of US$960/oz (cf US$1,002/oz), which was broadly in line with Q2 and generally ahead of our expectations despite Q3 typically being the weakest quarter in the year for Endeavour on account of the disruption to operations owing to the onset of the seasonal rains in West Africa. The results augur well for the final quarter of the year and we have increased our estimate of adjusted net earnings attributable to shareholders for Q4 (although our forecast for the full year remains little changed).

Valuation: Consistent at US$35.02/share

Using an absolute valuation methodology, whereby we discount back five years of cash flows and then apply an ex-growth, ad infinitum multiple to steady-state terminal cash flows in FY26, implies a present valuation for the company of US$35.02 (C$47.02 or £28.55) per share if performed using a 10% discount rate (cf US$35.54 previously) or US$57.63 (C$77.37 or £46.98) per share if performed using a CAPM-derived (real) discount rate of 6.47% (based on inflation expectations of 2.38% derived from US 30-year break-evens). To these valuations a further US$4.30–7.45/share may be added to reflect the value of Endeavour’s five-year exploration programme (see The second five-year plan, published on 20 October 2021). Otherwise, Endeavour is trading at a discount to the average multiples of its peers on at least 78% of common valuation measures, regardless of whether Edison or consensus forecasts are used, despite being the largest premium London Stock Exchange-listed pure gold producer in the UK 100 Index.

Exploration results on track to meet targets

Tanda-Iguela

On 21 November, Endeavour announced a major greenfield discovery in the Cote d’Ivoire, with 1.1Moz indicated and 1.9Moz inferred resources successfully delineated at Tanda-Iguela. The maiden total mineral resource of 3Moz averages c 2g/t (with higher grade mineralisation occurrences boasting an average grade of more than 3g/t) at the Assafou deposit and ranks it as one of the most significant discoveries made in West Africa in the last decade. The discovery was made within a very short (under 15 months) timeframe and at a very low discovery cost of less than US$10 per indicated ounce. The total defined area spans three kilometres in length and 350m in width and extends more than 300m from surface. To date, the delineated resource encompasses only 20% of the identified mineralised system and remains open at both strike and at depth. Moving forward, Endeavour expects to undertake an aggressive 70,000m drill programme in 2023 to both delineate further resources at Assafou and test new targets, of which the company has outlined at least 10 on the property. Initial metallurgical tests suggest a high gold recovery rate, above 95%, with data highlighting a low-cost approach to recovery.

Ity

Updated figures at Ity, released by Endeavour on 29 November 2022, display a 17% increase in its M&I resources totalling 101Mt at 1.62g/t Au containing 5.2Moz. Following the ongoing exploratory drilling programme (during 2022, 51,181 meters of drilling was completed at Ity, mainly within a 20km radius from the plant), the company has confirmed continuity of the mineralised system, which hosts seven deposits, located near the processing plant, resulting in a new single resource model for the area, with mineralisation remaining open at multiple deposits. Drilling has also confirmed the presence of a large mineralised system covering the Le Plaque area, located 7km from the processing plant. Finally, a significant discovery was made at the Gbampleu target, located 22km from the processing plant, as several high-grade and thick mineralised lenses were identified. With 0.8Moz gold delineated in this current year (2022) and c 2.0Moz in the past two years, Endeavour is well on the way to achieving its target of discovering 3.5–4.5Moz of indicated resources at Ity in 2021–25.

Discoveries relative to targets

On 30 September 2021, Endeavour announced a new five-year exploration discovery target of 15.0–20.0Moz of gold in the indicated category of resources at an average cost of less than US$25/oz. Full details of Endeavour’s announcement are included in its initial news release. A summary of the target, on a mine-by-mine basis, including year to date 2022 results, is as follows:

Exhibit 1: Endeavour Mining five-year M&I resource discovery target

Mine

2021 M&I resources*

5yr M&I resource discovery target

2022 M&I additional resources identified**

Tonnage

(Mt)

Grade

(g/t)

Contained gold (Moz)

Tonnage

(Mt)

Grade

(g/t)

Contained gold (Moz)

Tonnage

(Mt)

Grade

(g/t)

Contained gold (Moz)

Ity

89.5

1.56

4.5

47.0–54.0

2.00–3.00

3.5–4.5

11.2***

1.62***

0.75***

Houndé

103.9

1.55

5.2

25.0–67.0

1.40–5.00

3.0–4.0

-

-

 -

Sabodala-Massawa

110.1

1.94

6.9

24.0–48.0

1.50–3.50

2.3–2.7

-

-

 -

Wahgnion

40.7

1.48

1.9

21.0–39.0

1.20–3.00

1.5–2.0

-

-

 -

Fetekro

44.8

2.02

2.9

21.0–28.0

1.80–2.00

1.2–1.8

-

-

 -

Boungou

11.1

3.85

1.4

19.0–21.0

1.50–2.50

1.0–1.5

-

-

 -

Mana

37.6

1.89

2.3

12.0–24.0

1.30–4.00

1.0–1.5

-

-

 -

Sub-total

437.6

1.78

25.1

169.0–281.0

1.49–3.31

13.5–18.0

-

-

-

Greenfield properties

-

-

 -

18.0–49.0

0.95–3.50

1.5–2.0

14.9

2.33

1.1

Total

437.6

1.78

25.0

187.0–330.0

1.41–3.33

15.0–20.0

26.1

2.20

1.85

Source: Endeavour Mining, Edison Investment Research. Note: *Resources are shown inclusive of reserves on a 100% basis as of 31 December 2021. ** Resources are shown inclusive of reserves on a 100% basis as of 29 November 2022. ***Excluding 2022 mine depletion.

Within the context of its targets, Ity has already outlined an increased M&I resource in 2022, expanding its contained gold by 0.7Moz (or 16%) from 4.5Moz cf 5.2Moz after just one year of drilling. Similar results over the following four years would yield a pro-rata increase in resources of 3.5Moz (ie the lower limit of its target range). We also note the first data released for Tanda-Iguela, exhibiting 1.1Moz of contained gold, which equates to 73% of the lower limit of its target range of 1.5–2.0Moz, after just one year of exploration.

In general, Endeavour’s aims remain to continue to extend the lives of its core assets beyond its 10-year target. In addition, it has now achieved one of its objectives in the discovery of at least one more new standalone project via greenfield exploration, in the form of the Tanda-Iguela property in Côte d’Ivoire. Results for all other assets will be published in early 2023.

By their nature, the targets outlined in Endeavour’s announcement are conceptual. Nevertheless, a number of features of its programme are noteworthy:

The overall target of 15.0–20.0Moz was generated from a multi-screened and filtered estimate of 70 targets on the basis of a statistical probability of occurrence analysis of a type more usually associated with the oil and gas, rather than the mining, industry.

If successful, the five-year exploration target would effectively deliver Endeavour’s ancillary target of proving a more than 10Moz resource endowment (inclusive of historical production) at its flagship mines of Sabodala-Massawa, Houndé and Ity, thereby confirming them as Tier 1 assets.

Ity (as measured by the size of the exploration target) is perceived by Endeavour as offering the greatest prospectivity of all of its mines and the greatest potential to increase resources in both absolute and percentage terms.


Q322 results and analysis

A summary of Endeavour’s Q322 results is provided in the table below, showing both its headline and its underlying results:

Exhibit 2: Endeavour Mining Q322 results cf prior expectations and Q222

US$000s (unless otherwise indicated)

Q122a
(underlying)

Q222a

Q222a
(underlying)

Q322e

Q322a

Q322a

(underlying)

Change
***(%)

Variance
****(%)

Variance
****(units)

Houndé production (koz)

73.1

87.0

87

68.8

72.3

72.3

-16.9

5.1

3.5

Karma production (koz)

10.2

0.0

0

0.0

0.0

0.0

Ity production (koz)

72.4

76.9

76.9

63.2

80.9

80.9

5.2

28.0

17.7

Boungou production (koz)

33.8

27.0

27

29.9

29.3

29.3

8.5

-2.0

-0.6

Mana production (koz)

52.6

54.8

54.8

40.6

41.7

41.7

-23.9

2.7

1.1

Sabodala-Massawa

96.3

72.9

72.9

85.0

86.3

86.3

18.4

1.5

1.3

Wahgnion

28.9

26.5

26.5

26.5

32.3

32.3

21.9

21.9

5.8

Total gold produced (koz)

367.3

345.1

345.1

313.9

342.7

342.7

-0.7

9.2

28.8

Total gold sold (koz)

369.2

343.7

343.7

313.9

338.1

338.1

-1.6

7.7

24.2

Gold price (US$/oz)

1,904*

*1,832

*1,832

1,727

1,679

1,679

-8.4

-2.8

-48

Mine level cash costs (US$/oz)**

629

713

713

730

733

733

2.8

0.4

3

Mine level AISC (US$/oz)

828

934

934

1,002

921

921

-1.4

-8.1

-81

Revenue

– Gold revenue

703,400

629,600

629,600

539,170

567,633

567,633

-9.8

5.3

28,463

Cost of sales

– Operating expenses

232,200

251,200

251,200

229,046

247,923

247,923

-1.3

8.2

18,877

– Royalties

42,700

38,100

38,100

33,272

35,300

35,300

-7.3

6.1

2,028

Gross profit

428,500

340,300

340,300

276,852

278,700

278,700

-18.1

0.7

1,848

Depreciation

(153,900)

(139,800)

(139,800)

(141,665)

(151,200)

(151,200)

8.2

6.7

-9,535

Expenses

– Corporate costs

(14,000)

(6,800)

(6,800)

(15,000)

(12,400)

(12,400)

82.4

-17.3

2,600

– Impairments

0

– Acquisition etc costs

(1,300)

(1,000)

– Share based compensation

(7,700)

(3,100)

(3,100)

(6,207)

(4,200)

(4,200)

35.5

-32.3

2,007

– Exploration costs

(7,100)

(8,000)

(8,000)

(5,000)

(11,800)

(11,800)

47.5

136.0

-6,800

Total expenses

(28,800)

(19,200)

(17,900)

(26,207)

(29,400)

(28,400)

58.7

8.4

-2,193

Earnings from operations

245,800

181,300

182,600

108,980

98,100

99,100

-45.7

-9.1

-9,880

Interest income

Interest expense

(15,200)

(16,500)

(16,500)

(13,579)

(18,600)

(18,600)

12.7

37.0

-5,021

Net interest

(15,200)

(16,500)

(16,500)

(13,579)

(18,600)

(18,600)

12.7

37.0

-5,021

Gain/(Loss) on financial instruments

106,800

60,100

Other expenses

(10,600)

(7,400)

Profit before tax

230,600

261,000

166,100

95,401

132,200

80,500

-51.5

-15.6

-14,901

Current income tax

77,800

64,700

64,700

31,872

77,000

77,000

19.0

Deferred income tax

11,200

(8,200)

(8,200)

0

(11,900)

-11,900

45.1

Total tax

89,000

56,500

56,500

31,872

65,100

28,200

-50.1

-11.5

-3,672

Effective tax rate (%)

38.6

21.6

34.0

33.4

49.2

35.0

2.9

4.8

1.6

Profit after tax

141,600

204,500

109,600

63,529

67,100

52,300

-52.3

-17.7

-11,229

Net profit from discontinued ops.

0

0

0

0

0

Total net and comprehensive income

141,600

204,500

109,600

63,529

67,100

52,300

-52.3

-17.7

-11,229

Minority interest

22,600

15,100

15,100

12,124

9,500

15,800

4.6

30.3

3,676

Minority interest (%)

16.0

7.4

13.8

19.1

14.2

30.2

118.8

58.1

11.1

Profit attributable to shareholders

119,000

189,400

94,500

51,405

57,600

36,500

-61.4

-29.0

-14,905

Basic EPS from continuing ops (US$)

0.48

0.76

0.38

0.208

0.232

0.147

-61.3

-29.3

-0.061

Diluted EPS from continuing ops (US$)

0.48

0.76

0.38

0.207

0.232

0.147

-61.3

-29.0

-0.060

Basic EPS (US$)

0.48

0.76

0.38

0.208

0.232

0.147

-61.3

-29.3

-0.061

Diluted EPS (US$)

0.48

0.76

0.38

0.207

0.232

0.147

-61.3

-29.0

-0.060

Norm. basic EPS from cont. ops (US$)

0.48

0.34

0.38

0.208

(0.006)

0.147

-61.3

-29.3

-0.061

Norm. diluted EPS from cont. ops (US$)

0.48

0.34

0.38

0.207

(0.006)

0.147

-61.3

-29.0

-0.060

Adj net earnings attributable (US$000s)

122,300

111,300

111,300

51,405

36,500

36,500

-34.1

-29.0

-14,905

Adj net EPS from continuing ops (US$)

0.49

0.45

0.45

0.208

0.147

0.147

-34.2

-29.3

-0.061

Source: Endeavour Mining, Edison Investment Research. Note: *Includes Sabodala-Massawa stream. **Excludes royalty costs. ***Q322 (underlying) cf Q222 (underlying). ****Q322 (underlying) cf Q322e.

Items included in the reconciliation between adjusted net earnings attributable and total net and comprehensive earnings are losses from discontinued operations, gains/losses on financial instruments, other expenses and acquisition costs (all shown independently in the table above), plus the tax impact of adjusting items, non-cash and other adjustments and the minority interest attributable to the adjusting items (not shown independently). Unlike before, deferred tax effects and share-based payments are no longer included in the adjustments to total net and comprehensive earnings.

Gold produced and sold was roughly in line with Q222, with Q322 outperforming our production and sales estimates by 9.2% and 7.7%, respectively, leading to a positive variance of US$28.5m (or 5.3%) in revenue, relative to our prior expectations, driven by better-than-expected performances at Houndé, Ity and Wahgnion in particular. However, the positive variance in revenue was ultimately offset by an 8.2% negative variance in operating costs, a 6.7% negative variance in depreciation (almost exclusively attributable to Houndé), a 136% negative variance in (albeit largely discretionary) exploration costs and a 37.0% negative variance in net interest.

As in Q222, Q322 results were distorted by an exceptional gain on financial instruments of US$60.1m (largely unrealised gains on hedging contracts) and a tax charge inflated by an unusually large US$48m withholding tax payment linked to the upstreaming of cash to redeem the company’s convertible bond in February 2023, which increased Endeavour’s effective tax rate during the quarter to a preternaturally high 49.2%. Stripping out the effect of the financial gain but including the realised gains on gold hedges of US$19.7m (among other items), adjusted net EPS from continuing operations amounted to US$0.147/share (cf our prior forecast of US$0.208/share).

A comparison between Endeavour’s actual results and both our and the market’s prior forecasts for the quarter is as follows:

Exhibit 3: Edison adjusted net EPS from continuing operations estimates cf consensus FY22 by quarter

(US$/share)

Q122

Q222

Q322e

Q322a

Variance
(%)

Reported and Edison

0.493

0.448

0.208

0.147

-29.3

Mean consensus forecast

0.49

0.45

0.33

0.15

-54.5

High consensus forecast

0.49

0.45

0.43

0.15

-65.1

Low consensus forecast

0.49

0.45

0.24

0.15

-37.5

Source: Refinitiv, Edison Investment Research. Note: Consensus as at 17 November 2022.

FY22 forecasts

Endeavour’s Q322 results put it solidly on track to meet the top end of its guidance for the year of 1,315–1,400koz of production at an AISC of US$880–930/oz. In addition to incorporating its Q322 actual results into our full-year forecast, we have updated our gold price forecast to reflect a fractionally higher gold price in Q4 (US$1,727/oz cf US$1,713/oz previously). We have also attempted to forecast the effect of realised hedging gains/losses on earnings in the form of an estimate of the intrinsic value of these contracts for the quarter included in ‘Profit/(loss) on financial instruments’. As a result (and with the usual caveat around quarterly estimates), our updated forecast for adjusted net earnings attributable to shareholders for FY22 for Endeavour in the wake of its Q322 results is now as follows:

Exhibit 4: Endeavour Mining FY22 forecasts, by quarter

US$000s (unless otherwise indicated)

Q122

Q222

Q322

Q422e
(prior)

Q422e

FY22e

FY22e
(prior)

Houndé production (koz)

73.1

87.0

72.3

57.3

57.3

289.7

286.1

Karma production (koz)

10.2

0.0

0.0

0.0

0.0

10.2

0.0

Ity production (koz)

72.4

76.9

80.9

63.2

63.2

293.3

275.6

Boungou production (koz)

33.8

27.0

29.3

30.4

30.4

120.5

121.1

Mana production (koz)

52.6

54.8

41.7

43.1

43.1

192.1

191.0

Sabodala-Massawa

96.3

72.9

86.3

98.2

98.2

353.7

352.4

Wahgnion

28.9

26.5

32.3

43.1

43.1

130.8

125.0

Total gold produced (koz)

357.1

345.1

342.7

335.1

335.1

1,390.3

***1,361.5

Total gold sold (koz)

359.1

343.7

338.1

335.1

335.1

1,386.0

***1,361.9

Gold price (US$/oz)

1,911

*1,832

1,679

1,713

1,727

1,778

*1,783

Mine level cash costs (US$/oz)**

609

713

733

672

769

793

684

Mine level AISC (US$/oz)

809

934

921

887

882

889

909

Revenue

– Gold revenue

686,200

629,600

567,633

555,908

576,424

2,459,824

2,410,878

Cost of sales

– Operating expenses

217,500

251,200

247,923

225,314

222,158

944,458

923,059

– Royalties

41,000

38,100

35,300

34,174

35,608

150,008

146,546

Gross profit

427,700

340,300

278,700

296,421

318,658

1,365,358

1,341,273

Depreciation

(152,000)

(139,800)

(151,200)

(163,701)

(164,191)

(607,191)

(597,166)

Expenses

– Corporate costs

(14,000)

(6,800)

(12,400)

(15,000)

(15,000)

(48,200)

(50,800)

– Impairments

0

0

0

– Acquisition etc costs

(200)

(1,300)

(1,000)

(2,500)

(1,500)

– Share based compensation

(7,700)

(3,100)

(4,200)

(6,635)

(7,082)

(22,082)

(23,643)

– Exploration costs

(7,100)

(8,000)

(11,800)

(5,000)

-5,000

(31,900)

(25,100)

Total expenses

(29,000)

(19,200)

(29,400)

(26,635)

(27,082)

(104,682)

(101,043)

Earnings from operations

246,700

181,300

98,100

106,084

127,386

653,486

643,064

Interest income

Interest expense

(15,200)

(16,500)

(18,600)

(13,974)

(15,681)

(65,981)

Net interest

(15,200)

(16,500)

(18,600)

(13,974)

(15,681)

(65,981)

(59,253)

Profit/(loss) on financial instruments

(178,800)

106,800

60,100

11,458

(442)

(72,000)

Other expenses

(2,000)

(10,600)

(7,400)

(20,000)

(12,600)

Profit before tax

50,700

261,000

132,200

92,110

123,163

567,063

499,212

Current income tax

74,700

64,700

77,000

29,476

34,498

250,898

200,748

Deferred income tax

11,200

(8,200)

(11,900)

0

0

(8,900)

3,000

Total tax

85,900

56,500

65,100

29,476

34,498

241,998

203,748

Effective tax rate (%)

(169.4)

21.6

49.2

32.0

28.0

42.7

40.8

Profit after tax

(35,200)

204,500

67,100

62,634

88,665

325,065

295,463

Net profit from discontinued ops.

14,800

0

0

0

0

14,800

14,800

Total net and comprehensive income

(20,400)

204,500

67,100

62,634

88,665

339,875

310,263

Minority interest

21,800

15,100

9,500

11,968

13,758

60,158

60,991

Minority interest (%)

(106.9)

7.4

14.2

19.1

15.5

17.7

19.7

Profit attributable to shareholders

(42,200)

189,400

57,600

50,667

74,907

279,707

249,272

Basic EPS from continuing ops (US$)

(0.23)

0.76

0.232

0.205

0.303

1.069

0.946

Diluted EPS from continuing ops (US$)

(0.23)

0.76

0.232

0.205

0.303

1.067

0.942

Basic EPS (US$)

(0.17)

0.76

0.232

0.205

0.303

1.128

1.006

Diluted EPS (US$)

(0.17)

0.76

0.232

0.205

0.303

1.126

1.001

Norm. basic EPS from cont. ops (US$)

0.49

0.34

(0.006)

0.205

0.257

1.081

1.243

Norm. diluted EPS from cont. ops (US$)

0.49

0.34

(0.006)

0.205

0.256

1.079

1.237

Adj net earnings attributable (US$000s)

122,300

111,300

36,500

50,667

65,227

335,327

335,672

Adj net EPS from continuing ops (US$)

0.49

0.45

0.147

0.205

0.264

1.353

1.355

Source: Endeavour Mining, Edison Investment Research. Note: *Includes Karma and Sabodala-Massawa streams. **Excludes royalty costs (FY22e royalties: $150m, or c US$108/oz). ***Includes 10.2koz produced and 10.1koz sold from Karma in Q122.

Readers are reminded that Endeavour changed its definition of cash costs in Q420 to include royalties. The decision was made so that Endeavour may be more consistent in reporting within the context of its peer group. For reasons of comparability with past results, however, as well as ease of forecasting (given that royalties are reported as a standalone item distinct from operating expenses), we are continuing to calculate total cash costs in Exhibits 2 and 4 excluding royalties.

A comparison between our quarterly and full-year forecast and consensus forecasts for FY22 adjusted net EPS is as follows:

Exhibit 5: Edison adjusted net EPS from continuing operations estimates cf consensus FY22 by quarter

(US$/share)

Q122

Q222

Q322a

Q422e

Sum Q1–Q422e

FY22e

Edison

0.493

0.448

0.147

0.264

1.352

1.353

Mean consensus forecast

0.49

0.45

0.15

0.30

1.39

1.45

High consensus forecast

0.49

0.45

0.15

0.54

1.63

1.78

Low consensus forecast

0.49

0.45

0.15

0.18

1.27

1.25

Source: Refinitiv, Edison Investment Research. Note: Consensus at 17 November 2022.

Self-evidently, one of the main assumptions behind our forecasts is that there are no major deleterious effects to ongoing operations as a result of the COVID-19 pandemic. We also assume no collateral escalation of war between Russia and Ukraine into West Africa. To date, the effect of COVID-19 on Endeavour’s operations in West Africa has been negligible and is expected to remain so, as the company has now been able to vaccinate more than 50% of its workforce in an ongoing programme of pandemic mitigation. In addition, Endeavour has further mitigated future risks as far as possible by setting itself up to operate under level 2 COVID-19 restrictions (see our update note published on 17 December 2020) and by preparing multiple different levels in its pits from which to produce, thereby affording it maximum operational flexibility in the future.

Valuation

Endeavour is a multi-asset company that has shown a willingness and desire to trade assets to maintain production, reduce costs and maximise returns to shareholders (eg the sale of Youga in FY16, Nzema in FY17, Tabakoto in FY18, Agbaou in FY20 and Karma in FY22, and the acquisition of SEMAFO in FY20 and Teranga in FY21). Historically, rather than our customary method of discounting maximum potential dividends over the life of operations back to FY22, in the case of Endeavour, we have instead opted to discount five years of forecast cash flows in FY22–26 back to FY22 and then to apply an ex-growth terminal multiple of 10x (consistent with using a standardised discount rate of 10%) to forecast cash flows in that year (ie FY26). In the normal course of events, exploration expenditure would have been excluded from such a calculation on the basis that it is an investment. In the case of Endeavour, however, it was included on the grounds that it was a critical component of ongoing business performance in its ability to continually expand and extend the lives of its mines.

In the wake of the Q322 results, our estimate of cash flows in FY26 has been updated to US$4.24/share (cf US$4.27/share previously) – only really reflecting a modest rephasing of capex relating to the Fetekro/Lafigué project – which implies a terminal valuation of the company at end-FY26 of US$42.44/share (cf US$42.75/share previously) if calculated using a discount rate of 10%. In conjunction with forecast intervening cash flows, this terminal valuation then discounts back to a present valuation of US$35.02/share (cf US$35.54/share previously) at the start of FY22, as follows:

Exhibit 6: Endeavour forecast valuation and cash flow per share, FY22–26e (US$/share)

Source: Edison Investment Research

Given its elevation into the ranks of the world’s foremost producers of gold, however, we believe Endeavour can increasingly attract lower-cost finance and, as such, a CAPM-derived WACC can also be considered. In this case, long-term nominal equity returns have been 9% and 30-year break-evens are expecting an inflation rate of 2.3754% (source: Bloomberg, 21 November) cf 2.2625% previously. These two measures imply an expected real equity return of 6.47% (1.09/1.023754) and applying this to our forecast cash flows would imply a terminal valuation for Endeavour of US$65.59/share (cf US$64.88/share previously) and a current valuation of US$57.63/share (cf US$57.15/share previously).

In the meantime, Endeavour’s valuation remains at a material discount to those of its peer group, as shown in Exhibit 7, below.

Relative Endeavour valuation

Endeavour’s valuation on a series of commonly used measures, relative to a selection of gold mining majors (the ranks of which it has now joined since its takeovers of SEMAFO and Teranga have been completed), is as follows:

Exhibit 7: Endeavour valuation relative to peers

Company

Ticker

Price/cash flow (x)

EV/EBITDA (x)

Yield (%)

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Endeavour (Edison)

EDV

4.9

6.1

4.9

4.2

4.3

4.3

3.9

3.9

4.5

Endeavour (consensus)

EDV

4.5

4.6

4.6

4.2

4.6

4.4

3.8

4.0

4.0

Majors

 

Barrick

ABX

7.6

7.1

6.1

7.2

7.0

6.1

4.3

4.0

4.6

Newmont

NEM

9.5

9.7

9.3

8.5

8.0

7.1

4.8

4.2

3.8

Newcrest

NCM AU

7.3

7.2

6.7

6.3

6.2

5.7

1.7

1.9

2.3

Kinross

K

4.8

4.1

4.3

5.7

5.0

5.3

2.8

2.8

2.8

Agnico-Eagle

AEM

9.3

9.2

9.1

8.4

7.7

7.4

3.4

3.6

3.8

Eldorado

ELD

5.7

3.6

3.1

4.2

3.3

2.8

0.0

0.0

0.0

Average

 

7.4

6.8

6.4

6.7

6.2

5.7

2.8

2.7

2.9

Implied EDV share price (US$)

32.03

25.49

28.24

34.98

31.64

30.09

29.29

30.86

33.40

Implied EDV share price (C$)

43.62

34.71

38.45

47.64

43.09

40.97

39.88

42.02

45.49

Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced at 17 November 2022.

Of note is that, without exception, Endeavour’s valuation is materially lower than the averages of the majors on all of the measures shown in Exhibit 7, regardless of whether Edison or consensus forecasts are used. On an individual basis, it is cheaper than its senior gold mining peers on at least 41 out of 54 (76%) valuation measures if Edison forecasts are used and 42 out of 54 (78%) valuation measures if consensus forecasts are used. Reverse engineered, the average valuation measures of its peers imply an average share price for Endeavour of US$30.67, or C$41.93 (or £25.02), per share.

Financials

According to its Q322 balance sheet, Endeavour had net debt of US$48.1m (including leases) as at end-September, after US$36.7m in share repurchases during the quarter. This net cash figure compares with net cash and debt figures at the end of recent, comparable quarters as follows:

Exhibit 8: Endeavour Mining net cash/(debt)*

Q121

Q221

Q321

Q421

Q122

Q222

Q322

Net cash/(debt) (US$m)

(220.2)

(147.6)

(143.6)

13.2

82.7

162.1

(48.1)

Change (US$m)

(176.9)

72.6

4.0

156.8

69.5

79.4

(210.2)

Dividends paid (US$m)

60.0

69.9

69.3

97.3

Minority dividends paid (US$m)

29.9

57.2

Share buybacks (US$m)

59.5

34.6

43.9

31.1

6.7

36.7

Underlying net cash/(debt) change pre-shareholder returns (US$m)

(116.9)

132.1

138.4

200.7

169.9

86.1

(19.0)

Comment

Post-Teranga acquisition

Source: Endeavour Mining, Edison Investment Research. Note: *As per reported balance sheet.

This debt figure of US$48.1m includes lease liabilities of US$50.7m and an option premium of US$8.3m, which, if excluded, would result in an alternative net cash position of US$10.9m. This is equivalent to, but differs slightly from, the US$2.5m net cash figure calculated by Endeavour and quoted in its announcements owing to the discounting, variously, of certain committed future payments to present value. It also excludes US$31.8m held in the form of ‘restricted cash’ and US$40.0m in shares of Allied Gold received as consideration for the sale of Agbaou, both held in ‘non-current other financial assets’.

Note that, for the purposes of our financial modelling in Exhibit 8 and for simplicity’s sake, we have assumed that the consolidation of Endeavour’s and Teranga’s balance sheets took place retrospectively on 31 December 2020.

Exhibit 9: Financial summary

US$'000s

2019

2020

2021

2022e

2023e

2024e

December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,362,121

1,847,894

2,903,756

2,459,824

2,218,986

2,235,703

Cost of Sales

(884,869)

(1,061,891)

(1,675,393)

(1,199,147)

(995,810)

(1,007,684)

Gross Profit

477,252

786,003

1,228,363

1,260,677

1,223,175

1,228,019

EBITDA

 

 

618,443

910,295

1,517,263

1,263,177

1,223,175

1,228,019

Operating Profit (before amort. and except.)

 

281,400

281,400

546,072

859,409

655,986

761,714

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

(199,159)

(201,532)

(266,000)

(2,942)

0

0

Other

(9,392)

8,886

(32,263)

(20,000)

0

0

Operating Profit

72,849

353,426

561,146

633,044

761,714

707,316

Net Interest

(51,607)

(53,774)

(70,623)

(65,981)

1,612

2,276

Profit Before Tax (norm)

 

 

220,401

501,184

756,523

570,005

763,327

709,592

Profit Before Tax (FRS 3)

 

 

21,242

299,652

490,523

567,063

763,327

709,592

Tax

(97,253)

(158,466)

(178,253)

(241,998)

(216,607)

(149,734)

Profit After Tax (norm)

123,148

342,718

578,270

328,007

546,720

559,858

Profit After Tax (FRS 3)

(76,011)

141,186

312,270

325,065

546,720

559,858

Net loss from discontinued operations

(4,394)

0

0

14,800

0

0

Minority interests

33,126

44,719

64,486

60,158

89,696

88,338

Net profit

(80,405)

141,186

312,270

339,865

546,720

559,858

Net attrib. to shareholders contg. businesses (norm)

90,022

297,998

90,022

297,998

513,784

267,849

Net attrib.to shareholders contg. businesses

(109,137)

(109,137)

96,466

247,784

264,907

457,024

Average Number of Shares Outstanding (m)

157.4

157.4

160.8

250.7

247.9

246.9

EPS - normalised (c)

 

 

57.20

185.34

204.95

108.05

185.11

190.98

EPS - normalised fully diluted (c)

 

 

56.95

181.51

203.21

106.00

181.58

187.34

EPS - (IFRS) ($)

 

 

(0.72)

0.60

0.99

1.13

1.85

1.91

Dividend per share (c)

0

37

56

83

84

96

Gross Margin (%)

35.0

42.5

42.3

51.3

55.1

54.9

EBITDA Margin (%)

45.4

49.3

52.3

51.4

55.1

54.9

Operating Margin (before GW and except.) (%)

20.7

20.7

29.6

29.6

26.7

34.3

BALANCE SHEET

Fixed Assets

 

 

2,330,033

5,093,409

5,404,900

5,330,212

5,484,262

5,617,737

Intangible Assets

5,498

24,851

10,000

10,000

10,000

10,000

Tangible Assets

2,254,476

3,968,746

4,980,200

4,905,512

5,059,562

5,193,037

Investments

70,059

1,099,812

414,700

414,700

414,700

414,700

Current Assets

 

 

652,871

1,168,382

1,366,000

1,548,644

1,632,475

1,783,396

Stocks

266,451

305,075

311,300

307,478

277,373

279,463

Debtors

83,836

104,545

139,900

169,885

217,482

218,856

Cash

288,186

751,563

906,200

1,054,223

1,120,562

1,268,019

Other

14,398

7,199

8,600

17,058

17,058

17,058

Current Liabilities

 

 

(354,931)

(661,171)

(567,100)

(645,634)

(580,731)

(586,961)

Creditors

(312,427)

(612,862)

(552,700)

(631,234)

(566,331)

(572,561)

Short term borrowings

(42,504)

(48,309)

(14,400)

(14,400)

(14,400)

(14,400)

Long Term Liabilities

 

 

(963,736)

(1,647,799)

(1,818,100)

(1,818,100)

(1,818,100)

(1,818,100)

Long term borrowings

(770,902)

(1,026,337)

(878,600)

(878,600)

(878,600)

(878,600)

Other long term liabilities

(192,834)

(621,462)

(939,500)

(939,500)

(939,500)

(939,500)

Net Assets

 

 

1,664,237

3,952,821

4,385,700

4,415,122

4,717,907

4,996,072

CASH FLOW

Operating Cash Flow

 

 

628,617

1,046,370

1,415,306

1,329,930

1,140,779

1,230,786

Net Interest

(35,413)

(53,774)

(26,900)

(65,981)

1,612

2,276

Tax

(109,494)

(186,332)

(205,573)

(250,898)

(216,607)

(149,734)

Capex

(401,227)

(335,599)

(587,496)

(532,503)

(615,511)

(654,178)

Acquisitions/disposals

3,654

(19,000)

(4,700)

15,000

5,000

0

Financing

2,402

100,000

(89,400)

(98,589)

(0)

0

Dividends

(6,154)

(88,288)

(159,800)

(248,935)

(248,935)

(281,693)

Net Cash Flow

82,385

463,377

341,437

148,023

66,338

147,457

Opening net debt/(cash)

 

 

518,607

525,220

323,083

(13,200)

(161,223)

(227,562)

HP finance leases initiated

0

0

0

0

0

0

Other

(88,998)

(261,240)

(5,154)

0

0

0

Closing net debt/(cash)

 

 

525,220

323,083

(13,200)

(161,223)

(227,562)

(375,019)

Source: Company sources, Edison Investment Research. Note: Presented on a pro forma basis including SEMAFO from FY18 balance sheet and Teranga from FY20 balance sheet. EPS normalised from FY18 to reflect continuing business only. *Excludes restricted cash.


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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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